New Delhi: An expert committee has suggested that the government establish a Rs50,000 crore debt fund for infrastructure development, with around $2 billion (Rs9,400 crore) sourced from foreign exchange reserves.
The committee, which included officers from key infrastructure ministries, regulatory authorities and consultants, has proposed that the fund be set up as a trust, to be regulated by the Securities and Exchange Board of India (Sebi).
The panel, headed by Deepak Parekh, chairman of India’s oldest mortgage lender Housing Development Finance Corp. Ltd, has also outlined several legislative changes before the fund can be set up.
Money for the fund could also be sourced from the International Finance Corporation (IFC) and the Asian Development Bank (ADB) as well as from sovereign funds, the panel has suggested.
The India Infrastructure Debt Fund proposes to refinance bank lending to infrastructure projects where construction is completed. It is being proposed in the backdrop of an expected Rs2 trillion gap in debt financing in the 11th Plan (2007-12) after accounting for bank lending.
The five-year Plan calls for investments of more than Rs20 trillion in infrastructure, 36% of which is to be mobilized from private firms.
Currently, infrastructure firms rely on the commercial banking system for much of their project finance needs.
In a recent conference, State Bank of India (SBI) chairman O.P. Bhatt said bank lending to the infrastructure sector had increased from Rs7,000 crore in 2000 to nearly Rs2.7 trillion in 2009.
But banks rely on deposits, which are short-term in nature, for much of their lending, whereas infrastructure needs long-tenure loans.
The panel has recommended that only competitively bid public-private partnership projects—where private firms vie for the rights to develop and maintain public infrastructure—be eligible to borrow from the proposed fund. Lending should be restricted to projects with tenures of more than 10 years, it has said.
It is not immediately clear if the panel’s proposal would be accepted in its current form.
Some observers are already raising concerns about the proposed fund, including whether it will be able to deliver on its promise of low-cost funds.
“The cost of hedging 10-year money is much more than the the cost of hedging three-year money. The whole idea of providing long-term money at low cost is self-contradictory,” said a government official, who did not want to be named. “If the present cost of borrowing from banks is 11%, then low cost has to be at least 100-200 basis points less.”
One basis point is one-hundredth of a percentage point.
The cost of fully hedged foreign commercial borrowing would be 9%, to which the fund would add a spread of 100 basis points as administrative costs, making the rate of lending about 10%, the official said.
This official added that the proposal for the fund’s sponsors to buy back half of the debt provided by sovereign funds and foreign pension funds by issuing tax-free bonds or on the back of sovereign guarantees, would have revenue and fiscal responsibility, and budget management implications as well.
The panel has proposed that the debt fund could be set up by sponsors such as India Infrastructure Finance Co. Ltd, SBI, infrastructure non-banking financial companies or even investment banks as general partners. These sponsors would have to invest at least Rs5,000 crore.
The government would also require approvals from the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority for insurance firms and pension funds to invest in the debt fund.
While infrastructure analysts welcomed the proposal, much depends on the rate of interest at which it would lend to developers, said Amrit Pandurangi, who heads the transport and infrastructure practice at audit and consulting firm PricewaterhouseCoopers.
Gajendra Haldea, adviser to Montek Singh Ahluwalia, deputy chairman of the Planning Commission, said interest costs would go down.
“Development of this methodology will enable better project financing with longer tenure as larger avenues of raising capital will open up. This will also reduce the interest costs, which can go down by 2%, which will also help reduce bid price,” he said.
Haldea added that it may take three-four months for the proposal to be implemented. “Of course, much depends on the finance ministry, which has to take initiatives in tweaking certain Acts and guidelines,” he said.
The report is expected to be submitted to the finance ministry in a week, Haldea added.